FINANCIAL

PLANNING
FINANCIAL PLANNING
GENERALLY SPEAKING, THE FINANCIAL
PLANNING PROCESS IS ARTICULATED
IN A DOCUMENT CALLED THE
FINANCIAL PLAN . GENERALLY
SPEAKING, THE FINANCIAL PLANNING
PROCESS IS ARTICULATED IN A
DOCUMENT CALLED THE FINANCIAL
PLAN.
FINANCIAL PLANNING IS OFTEN
DEFINED AS THE FORECASTING OF A
BUSINESS’ FUTURE FINANCING
REQUIREMENTS. 2
THE FINANCIAL PLAN IS
DIVIDED INTO TWO
LONG-TERM AND SHORT-TERM
FINANCIAL PLAN
1. the long-term financial
plan, also known as
strategic financial plan.
2. the short-term financial
plan, also known as the
operating financial plan.

4
LONG-TERM
FINANCIAL
PLAN
A long-term financial plan involves
forecasting the financing
requirements of a business three- to
five- years down the road.
SHORT-TERM
FINANCIAL
PLAN
The short-term financial plan involves
forecasting the financing
requirements of a business within a
year or less, and as is expected is
more detailed than the former.
THERE ARE FIVE(5)
SIMPLE STEPS IN
DEVELOPING THE LONG-
TERM PLAN
A. FORECAST YOUR SALES
In doing sales forecasting, it
helps if it starts with an
understanding of the
industry your business
belongs to, knowing your
target market segment from
that industry, and ultimately,
forecasting your market
share in terms of sales from
that segment. 8
B. COMPUTE THE DIVIDEND
PAYOUT RATIO AND THE
PLOWBACK RATIO.
If the business pays any
cash dividend, then this
dividend amount should
be divided by net income
to get the dividend payout
ratio. This ratio tells us
the proportion of net
income paid out as 9

dividends.
C. IDENTIFY YOUR SPONTANEOUSLY-
GENERATED FUNDS
From the word
"spontaneous," which means
"done naturally," these funds
come about as a result of
normal business operations.
If a business wants to
increase its sales, then it has
to load up on its inventory,
otherwise it would have just
very few items or units to sell. 10
D. USE THE PERCENT OF SALES
APPROACH TO PREPARE THE PRO
FORMA FINANCIAL STATEMENTS.
This approach calls for
dividing expenses, assets,
and liabilities by the sales
figure. This sales figure can
be based on the latest
available financial
statement, the average
figure the past few years, 11
or a combination of both.
E. CALCULATE YOUR EXTERNAL
FINANCIAL NEED (EFN)
EFN, also known as
Additional Funds Needed
(AFN) and Discretionary
Financing Needs (DFN), is
the required additional
financing, through the
additional issuance of
interest-bearing debt and
common stock, to acquire
the needed assets. 12
EXAMPLE OF INCOME STATEMENT

Income Statement Percent of Sales

Sales 9,268,315.00 ​

Costs​ ​ ​5,007,573.25 ​55.00%

Taxable Income​ ​4,170,741.75

Taxes (30%)​ ​ ​1,251,222.53 ​

Net Income 2,919,519.23 31.50%

Dividends (0%) 0.00

Addition to 2,919,519.23

Retained Earnings 13
PRO FORMA INCOME STATEMENT

Pro Forma Income Statement Percent of Sales

Projected Sales (20%) 11,121,978.00 ​

Costs​(55%) ​ ​6,117,087.90 ​55.00%

Taxable Income​ ​5,004,890.10

Taxes (30%)​ ​ 1,501,467.03​ ​

Net Income 3,503,423.07 31.50%

Dividends (0%) 0.00

Addition to Retained
3,503,423.07
Earnings
14
3.2 THE BUDGET PREPARATION
The primary tool in short-term financial planning is the cash budget, also
known as cash forecast. It plots the business' projected cash inflow and
outflow and is typically done monthly and is used to cover a year's time.
Cash Budget
January February March
Cash Receipts
Less: Cash Disbursements
Net Cash Flow
Add: Beginning Cash
Ending Cash
Less: Minimum Cash
Balance
Required Total Financing
Excess Cash Balance
15
SIMPLE STEPS OF
PREPARING THE CASH
BUDGET
STEPS:
1. Forecast the business' monthly sales. Again, this can be done 7. Take into account other cash disbursements. Other cash
using historical figures. disbursements include wages and salaries, taxes, capital
expenditures, rent, and interest payments.
2. Forecast the cash sales and the credit sales from the projected
monthly sales. Cash sales are more preferable to credit sales. If 8. Sum up the total cash disbursements.
sales are made on credit, then estimate when those receivables
will be collected. 9. Subtract the total cash disbursements from the total cash
receipts to get the net cash flow.
3. Take into account other cash receipts. Other cash receipts are
sources of cash other than sales such as interest payment 10. Add the beginning cash balance to the net cash flow to get the
received, among others. ending cash balance. The ending cash balance of the previous
month is the beginning cash balance of the following month.
4. Sum up the total cash receipts.
11. Subtract the minimum cash balance from the ending cash
5. Forecast the business' monthly purchases. balance. The minimum cash balance, also known as target cash
balance, is the minimum cash balance the business needs to have
6. Forecast the cash purchases and the credit purchases from the on hand, to conduct its day to day operations. If the minimum cash
projected monthly purchase. If purchases are made on credit, balance is greater than the ending cash balance, then short-term
then forecast when those payables will be paid. financing is required. If, on the other hand, the minimum cash
balance is less than the ending cash balance, then the business
has excess cash.
17
EXAMPLE:​
Sales
Jan​ ​Feb Mar Apr May
Forecast​
​ ​ 150,000.00 ​220,000.00 380,000.00 340,000.00 295,000.00
​ ash sales
C
22,500.00​ ​33,000.00 57,000.00 51,000.00 44,250.00
(15%)
Accounts
Receivables ​ ​
Collections ​
Lagged 1
82,500.00 121,000.00 209,000.00 187,000.00
month
Lagged 2
45,000.00 66,000.00 114,000.00
month
Other cash
150,000.00 150,000.00 150,000.00 150,000.00 150,000.00
receipts
Total cash
172,500.00 265,500.00 373,000.00 476,000.00 495,250.00
receipts
18
 Jan​ F​ eb Mar Apr May
​ urchases
P ​ 120,000.00 ​176,000.00 304,000.00 272,000.00 235,000.00
​Cash purchases 6,000.00​ ​8,800.00 15,200.00 13,600.00 11,800.00
Accounts payable
​ ​
payment
Lagged 1
96,000.00 140,800 243,200.00 217,600.00
month
Lagged 2
18,000.00 26,400.00 45,600.00
month
Rent payments 15,000.00 15,000.00 15,000.00 15,000.00 15,000.00
Wages and salaries 19,500.00 23,000.00 31,000.00 29,000.00 26,750.00
Tax payments 40,000.00
Fixed asset outlay

Interest payment 110,000.00 110,000.00 110,000.00 110,000.00 110,250.00

Principal payments 150,000.00

Total cash
150,500.00 252,800.00 530,000.00 477,200.00 576,750.00
19
disbursements
​ Jan​ ​Feb Mar Apr May
Cash receipts 172,500.00 ​265,500.00 373,000.00 476,000.00 495,250.00
Less:Cash
150,000.00​ ​252,800.00 530,000.00 477,200.00 576,750.00
disbursements
Net cash flow ​ ​22,000.00 12,000.00 -157,000.00 - 1,200.00 – 81,500.00
Add:
Beginning 70,000.00 – 87,000.00 –88,200.00
cash
Ending cash 70,000.00 -87,000.00 – 88,200.00 –179,200.00

Less:
Minimum 90,000.00 90,000.00 90,000.00
cash balance

Required
-177,000.00 178,200.00 –259,200.00
Total financing

Excess
balance cash
20
A close relation of the current ratio
which you learned in chapter 2 is
the Net Working Capital (NWC).
This is computed by subtracting
the business' current liabilities from
its current assets. One thing to
remember is that an NWC of zero
is equivalent to a current ratio of
one. Just like the current ratio,
NWC is also a measure of liquidity
and as such, a higher NWC means 21

the business is more liquid.

THIS TEXT EXPLAINS TWO IMPORTANT FINANCIAL
CYCLES FOR BUSINESSES: THE OPERATING CYCLE AND
THE CASH CONVERSION CYCLE.
Operating Cycle: This cycle tracks the time Conversion Cycle: This cycle tracks the time it
it takes from purchasing raw materials to takes for a business to get its money back
receiving cash from selling the finished after paying for its raw materials.
product.
• It's calculated by subtracting the Accounts
It's made up of two parts Payable Period (the time it takes to pay
suppliers) from the Operating Cycle.
• Inventory Period: The time it takes to sell
the finished product after buying the raw • A shorter cash conversion cycle is also
materials. more beneficial because it means the
business has more cash on hand.
• Accounts Receivable Period: The time it
takes to collect payment from customers The example of Good Food Snack House
after selling the product. shows how to calculate these cycles using the
Inventory Period and Accounts Receivable 22
A shorter operating cycle is better for Period.
businesses because it means they can get their
money back faster.
TWO IMPORTANT FINANCIAL CONCEPTS FOR
BUSINESSES
1. Accounts Payable Period: This is the time a business A shorter cash conversion cycle is also better
takes to pay its suppliers for the raw materials it buys. because it means the business has more cash on
hand.
• It's calculated by dividing the total cost of goods sold by
the average payables. Manage accounts receivables: Collect payments
from customers as quickly as possible to avoid delays
A shorter accounts payable period is better because it and maximize cash flow.
means the business has more cash on hand.
Theses topic also mentions the "5Cs of Credit," which
2. Cash Conversion Cycle: This is the time it takes for a are a set of guidelines for businesses to follow when
business to get its money back after paying for its raw extending credit to customers. These guidelines help
materials. businesses assess the creditworthiness of customers
and reduce the risk of bad debt.
• It's calculated by subtracting the Accounts Payable
Period from the Operating Cycle (the time it takes from
buying raw materials to collecting cash from sales).

23
THE 5CS OF
CREDIT IS A SET
OF GUIDELINES OF
CAREFULLY
SELECTING YOUR
CUSTOMERS
5CS OF CREDIT
1. Character. This refers to the customer's track record of settling its
obligations on time. More often than not, customers without a track record
should not be given credit.

2. Capacity. This refers to the capacity of the customer to repay you. in

Chapter 2
This is typically done through

3. Capital. This refers to the customer's level of capital in relation to its debt
level.

4. Collateral. This refers to the value of the assets that the customer has
and plans to use to secure the credit.

5. Conditions. This refers to the general global and home country 25

macroeconomic conditions and the industry-specific conditions.
THANK
Marquez
Murad
Eugenio

YOU Utto
Abdullah
Valete
Revadona
Doronio